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The Bank of Japan had better be braced for a big battle as it tries to stop the yen from rising to record highs against the dollar.
Currency intervention only works at the best of times and these are not the best of times for the yen.
There is little doubt that the strength of the yen is unwarranted. The currency was overvalued by as much as 6% even before the earthquake in Japan last Friday prompted buying, as the market began to anticipate the repatriation of funds.
Also, with Japanese interest rates down at virtually zero and the Bank of Japan pouring in an additional Y31 trillion of liquidity in the last four days alone, yields on the yen can hardly be described as attractive.
Nonetheless, as the Bank of Japan found to its cost last September, international support for the Japanese currency remains strong.
Back then, the central bank launched its largest ever solo intervention exercise, spending Y2.13 trillion in a futile attempt to stop the dollar from falling under Y85. Needless to say, the dollar kept on falling and a strong yen remained a problem for Japanese exporters as the country struggled to stop slipping back into recession.
By the time the earthquake – and then the tsunami – hit Japan’s north-east coast nearly a week ago, the dollar was still down at Y83.
If anything, the need for a weaker yen now has become even more acute than it was last September. Since the earthquake, the currency has rallied another 8%, breaking to a new record high of Y76.25 against the dollar late on Wednesday. And the growth prospects for the Japanese economy have deteriorated rapidly.
For the moment, though, the Bank of Japan is nowhere to be seen.
This could be because the bank is choosing to play a cat-and-mouse game that leaves the market guessing over just what it plans to do.
Or, it could be because the Japanese are hoping to get international support as the ongoing threat of nuclear contamination from the damaged nuclear reactors at Fukushima still poses a risk for financial markets in general. A weaker yen will then be in the self-interest of other major economies as much as it is now for Japan.
The need for a coordinated intervention exercise, which would have a much better chance of pushing the yen lower, will more than likely be part of the G-7 discussions on Japan.
But, there is another reason why the Bank of Japan may be reluctant to rush into the market just yet–uncertainty over just what is driving the yen higher.
If flows into the yen represent a longer-term shift of investment back into Japan from overseas, these could prove difficult to reverse.
But, if they only represent speculative interest as market players look for more yen gains in the future, then the Bank of Japan may have a better chance of turning market sentiment around. At the moment, no one seems to be sure, although the Ministry of Finance in Tokyo has been keen to point to speculators as the main problem.
A study by Citigroup also suggests that repatriation flows may be not be anywhere as large as the market has been anticipating as the amount of funds that insurance companies, pension funds and even Japanese banks will need to bring home aren’t that big after all.
If that is the case, then the Bank of Japan has a better chance of halting the yen’s advance. If not, the bank could find itself entering a prolonged intervention battle that could cost it considerably more than its efforts to get the yen down back in September.
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I just want to comment on gregg pascal zachary book, i read a few days ago married to africa. I think if you want to to write a good and intresting book you should be precise a good story is a truthful story. he met his wife Tina connie okon a nigerian born illiterate woman in a night club who is a well known prostitute on the street of accra who solicite for money from any white man who is ready to pay her price, contrary to what zachary said on his book. i hope she shoud be clear enouhg to tell that part of the story. TW
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